Why Accountants Need to Learn About Bitcoin

While most of the mainstream media would have you believe Bitcoin is a tool used by the internet’s underworld, Bitcoin users are growing well into the mainstream. Bitcoin is a digital currency that has tremendous advantages and, like it or not, it is becoming much more popular in all social circles.

Bitcoin is a decentralized, peer-to-peer system of money. It has no governing body and is nearly 100% fraud-proof. This in itself can have huge implications on the overall financial sector. As an accountant, it is important to at least be ready to field questions on Bitcoin in relation to tax, portfolio diversification and cross-border payments.

Do you have to pay tax when converting Bitcoin to fiat money? Or when changing it for another cryptocurrency? What about on potential earnings from a Bitcoin casino? How is a potential salary or a payment for rendered services taxed when the remuneration is in crypto?

There are many. Here are a few things every accountant should know about Bitcoin.

Bitcoin & Taxes

While Bitcoin has remained rather unregulated and untaxed for the most part, the capital gains seen by investors in 2017 have caught the attention of the IRS and other tax agencies globally. Currently, many Bitcoin investors are unsure of how to proceed.

In terms of Bitcoin taxation, the rules with capital gains are usually only applied when converting Bitcoins back into fiat currencies. That being said, recent rulings on cryptocurrency to cryptocurrency trades in the US have deemed these types of transactions taxable based on barter laws on a federal level.

For example, even though a client may have Bitcoin and exchanges it for Ethereum or another cryptocurrency, the client would be required to pay taxes on the fair market value of those assets.

As cryptocurrency has a listed market value, it is important for clients to ensure that they keep track of every transfer and every trade, even when that trade is with themselves (from one personal wallet to another).

Additionally, if the client holds Bitcoin or a similar cryptocurrency for less than one year, any profits made on the sale are taxable at the normal income tax rates. Any digital currency held for longer than 12 months is considered a long-term capital investment and the standard 15% capital gains tax applies on the profits.

These are the current rules, however, as Bitcoin and digital currencies are an asset class that is just emerging, rules are very likely to change and it is imperative to stay on top of those changes.

Portfolio Diversification

Due to huge sector-wide opportunities for capital gains, many clients will be looking to diversify into the sector. While there are few accountants that understand the Bitcoin and cryptocurrency markets, learning about them will definitely help in providing an all-around service for your clients.

For example, many exchanges won’t accept American citizens due to the grey areas of taxation and regulations. But exchanges based in Singapore are still willing to provide exchange and brokerage services to these citizens, provided an offshore company is established within their jurisdiction.

Payments & Merchant Services

A final point that accountants should research is the cross-border and merchant services that Bitcoin can power. For many internet businesses, Bitcoin acceptance is a must. As those clients begin accepting Bitcoin for everyday transactions, it is important to ensure that accounting practices are followed.

Bitcoin is different than other payment processors as it can pose a substantial savings to clients that incorporate it into their business models.

For example, though PayPal is widely used, the fees associated with PayPal run as high as 3-5% based on volume. With Bitcoin and other Cryptocurrencies, those fees are reduced by as much as 95%.

For those looking to pay suppliers overseas, using Bitcoin can save both time and money because a Bitcoin payment takes a maximum of 10 minutes and does not require conversion between multiple currencies.

These are just a few questions that will come up as Bitcoin and similar currencies grow in popularity. As all accountants are expected to know about the financial sector and the innovations in the monetary marketplace, educating yourself on Bitcoin is a must. The truth is, it will only become more important and far reaching as time goes by. To learn more, visit this infographic on Bitcoin.

Comments (1)

Volatility needs to be considered

IMHO any article on Bitcoin - especially one directed toward small business - needs to discuss its volatility. A link to an infographic is not sufficient. Anyone considering any form of cryptocurrency needs to fully understand the risks involved - and be able to cover potential losses (see #45 on the infographic referenced). The fact the article only mentions profit, gains and savings and the word 'loss' does not appear leads me to think that the authors themselves do not understand Bitcoin. There are two sides to every coin - even the virtual ones.